2017 (2) TMI 685 - AT - Income Tax

Addition u/s 153A - Held that - The issues with regard to deduction under section 80-IA of the Act and arm s length price of international transaction between the assessee and its associated enterprise could not and ought not to have been examined by the Assessing Officer in the assessment proceedings, under section 153A of the Act as the said issues stood concluded with the assessee s return of income on these issues being accepted in the assessment completed under section 143(3) of the Act prior to the date of search. In respect of assessments completed prior to the date of search that have not abated, the scope of proceedings under section 153A of the Act has to be confined only to material found in the course of search. Since no material whatsoever was found in the course of search, the additions made by the Assessing Officer in the assessment completed under section 153A of the Act for the assessment year 2003-04, 2004-05 and 2005-06 could not have been subject-matter of proceedings under section 153A of the Act for those years. As for claim of the assessee in the assessment under section 153A of the Act for the aforesaid assessment years that sales Tax remission subsidy which was originally offered to Tax and brought to Tax in the original assessment under section 143(3) of the Act, is not Taxable, we are of the view that even these claims could not be made by the assessee. These claims were independent claims and had no nexus or interconnection with the determination of total income under section 153A of the Act based on incriminating material found in the course of search. Therefore, these claims could not have been and ought not to have been the subject- matter of determination of total income under section 153A of the Act for the aforesaid assessment years. In view of the above conclusion, the other grounds of appeal raised by the assessee in its appeal and the grounds raised by the Revenue in its appeal for these assessment years do not require any consideration. Claim of deduction of 80-IA - Held that - there are exceptional difficulties in computing the profits and gains of the eligible business by applying the main provisions of section 80-IA(8) of the Act and Therefore, the proviso to section 80-IA(8) of the Act would apply and the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. In our view, interest of justice would be met by setting aside the order of the Assessing Officer on this issue and directing the Assessing Officer to determine the profits and gains of the undertaking generating power on a reasonable basis after affording the assessee opportunity of being heard. The discretion given to the Assessing Officer under the proviso to section 80-IA(8) is not a subjective satisfaction but an objective one and Therefore, the reasonableness of the action of the Assessing Officer should be justifiable. With these observations, we allow the relevant ground of appeal of the Revenue for statistical purpose. Sales Tax remission - whether the Dispute Resolution Panel could have directed AO to entertain the claim of the assessee that sales Tax remission received by it is capital receipt not chargeable to Tax when the said claim was not made by filing a revised return of income before the Assessing Officer but only by filing a computation of income before the Assessing Officer? - Held that - Assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired. In the light of the aforesaid decisions, we are of the view that the Dispute Resolution Panel was right in accepting the revised claim that sales Tax remission received is capital receipt and not chargeable to Tax. Determining the true character of the subsidy one has to ascertain the purpose of the scheme under which the subsidy is received. If the purpose of the scheme is to finance setting up of a new unit or expansion of an existing unit, then the subsidy shall constitute a capital receipt notwithstanding the fact that the subsidy was in the form of sales Tax exemption. Further, the point of time at which the subsidy is received is also immaterial. The features of the scheme applicable to the assessee s case (as discussed above), show that the scheme was brought about to assist entrepreneurs in setting up new units/expanding existing units in backward areas. Thus, the subsidy received in the form of sales Tax exemption clearly constitutes a capital receipt not chargeable to Tax. Assessing Officer is bound by the directions of the Dispute Resolution Panel and the action of the Assessing Officer in reducing the value of sales Tax remission from the block of fixed assets was in violation of the mandate laid down in section 144C(10) of the Act. In fact ground No. 5 raised by the Revenue is itself an admission by the Assessing Officer that there was no direction by the Dispute Resolution Panel to reduce the value of sales Tax remission from the block of fixed assets and allow lesser depreciation to the extent of sales Tax remission held to be capital receipt not chargeable to Tax. Thus ground No. 4 raised by the assessee is allowed. Addition on excess depreciation claim - Held that - The scheme applicable to the assessee s case nowhere specifies that the subsidy was to be utilised for acquisition of fixed assets. The scheme was brought about to encourage and induce the entrepreneurs to move to backward areas and establish industries there so that the region may develop in promoting the welfare of the people living in that region. Thus, in the absence of any specification (in the scheme) as to the utilisation of the subsidy for the purpose of acquiring depreciable fixed assets, the said subsidy cannot be reduced from the actual cost of the fixed assets under section 43(1) read with Explanation 10. Thus the amount disallowed on ground of excess depreciation claim, should be allowed. TPA - LIBOR rate application - Held that - Instead of the base rate of 8 per cent. (based on lending rates of banks in India, for commercial borrowing), it would be appropriate to apply LIBOR rate (and not domestic lending rate). We direct accordingly. Whether any percentage has to be added over and above the LIBOR rate on account of credit rating of the associated enterprise? - Held that - Following the decision of Kohinoor Foods Ltd. 2015 (7) TMI 147 - ITAT DELHI action of the Transfer Pricing Officer in using data issued by Standard and Poor is clearly bad in law. Consequently the addition of interest rate on account of borrower risk in addition to the LIBOR rate was not justified. We are also of the view that the safe harbour rules referred to in the order of the Dispute Resolution Panel is not applicable, to the disputes before the Dispute Resolution Panel and Therefore, cannot be applied in the present case. We hold accordingly. Corporate guarantee provided - obtaining the loan by the associated enterprise - Held that - We agree with the plea of the learned authorised representative that the arm s length guarantee commission adopted at 2 per cent. by the Dispute Resolution Panel cannot be sustained.Even the assessee has paid 0.40 per cent. as guarantee commission to a bank for similar services. The Safe Harbour Rules prescribing 2 per cent. as the guarantee commission is not relevant as those rules are relevant only to an eligible assessee who opts to be governed by those rules. Accordingly, following the decisions of the Tribunal referred to above, we direct the Assessing Officer/TPO to adopt the 0.5 per cent. as guarantee commission charges in respect of the guarantee provided by the assessee for obtaining the loan by the associated enterprise. Short credit for Tax deducted at source - Held that - Assessing Officer is directed to give effect to the Dispute Resolution Panel s direction by making verification of TDS certificate that may be filed in physical form as well as from details from 26AS, and give credit for Taxes deducted at source Sale proceeds of CER units - carbon credits received is capital receipt not chargeable to Tax or revenue receipt chargeable to Tax - Held that - Receipts from sale of carbon credits constitute capital receipts which are not chargeable to Tax at all. Computation of disallowance under section 14A - Held that - We are of the view the submission made with regard to availability of own funds in the light of overall funds position without insisting on direct nexus between investments and own funds would be the right approach as held by the Hon ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . If the overall funds position i.e., if own funds are sufficient to cover the investments which are subject to consideration under section 14A of the Act, then a presumption has to be drawn that the own funds were used for making investments. We are of the view that it would be just and proper to restore the disallowance under section 14A of the Act to the Assessing Officer for a fresh consideration Amount receivable on the completion of a contract including any money retained or undisbursed - whether had accrued to the assessee and was thus its income for the year - Held that - As on the date when the bills were submitted, having regard to the nature of the contract, no enforceable liability accrued or arose and, accordingly, it could not be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of bills. The assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. Therefore, it is correct in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits of the assessee for the assessment year in question. Forfeiture of share warrants monies - Held that - The price of the shares of the assessee had steeply fallen in the period of holding of the share warrants and was approximately ₹ 35.34, ₹ 43.24 and ₹ 43.26 respectively at the time of exercise of the option of conversion. The assessee being a listed company, the price of the shares could be substantiated from listings in the recognised exchange. Based on the above, any prudent person would purchase the shares of the assessee from the stock exchange rather than the conversion of the share warrants by payment of a substantially higher rate (for example, in case of promoter companies market price was ₹ 35.34 as compared to balance price of ₹ 68.40 which was to be paid by them upon conversion). In view of the same, the promoters and the non-promoters did not opt for conversion of share warrants. The prudence of the same is also evident from the fact that even the non-promoters to the share warrants did not opt for the conversion as is also confirmed by the learned Assessing Officer in the impugned order. In the light of the discussion as above, we do not find any merits in the ground raised by the Revenue and the same is dismissed. Additional depreciation not claimed in the earlier assessment year (2010- 11) be allowed in the current assessment year 2011-12.

Summary

Issues Involved:

1. Scope of proceedings under section 153A of the Income-Tax Act.
2. Claim of sales tax remission as capital receipt.
3. Disallowance under section 80-IA.
4. Transfer pricing adjustments.
5. Disallowance under section 14A.
6. Forfeiture of share warrants.
7. Adjustment of refund and credit for tax deducted at source (TDS).
8. Additional depreciation under section 32(1)(iia).
9. Sales proceeds of Carbon Emission Reduction (CER) units as capital receipts.
10. Depreciation on account of sales tax remission and industrial promotion assistance (IPA).

Detailed Analysis:

1. Scope of Proceedings under Section 153A:
The Tribunal held that in assessments under section 153A, if there is no incriminating material found during the search, the Assessing Officer cannot make any additions and must adopt the total income already determined in the unabated assessment under section 143(3). This conclusion is supported by judicial precedents, including CIT v. Kabul Chawla and CIT v. Continental Warehousing Corporation.

2. Claim of Sales Tax Remission as Capital Receipt:
The Tribunal concluded that sales tax remission is a capital receipt not chargeable to tax. This decision aligns with judicial precedents such as CIT v. Ponni Sugars and Chemicals Ltd., which emphasize the purpose test to determine the nature of the subsidy. The subsidy was intended to assist in setting up new units or expanding existing units, thus qualifying as a capital receipt.

3. Disallowance under Section 80-IA:
The Tribunal remanded the issue to the Assessing Officer to determine the profits and gains of the undertaking generating power on a reasonable basis. The Tribunal emphasized that the market value should be computed considering statutory controls on the price of power, applying the proviso to section 80-IA(8).

4. Transfer Pricing Adjustments:
The Tribunal directed the use of LIBOR rates for benchmarking loans given in foreign currency, rejecting the use of domestic lending rates. Additionally, the Tribunal found that the safe harbor rules for credit spread were not applicable, and the Transfer Pricing Officer's arbitrary credit rating adjustments were invalid.

5. Disallowance under Section 14A:
The Tribunal directed the Assessing Officer to consider only those investments which yielded dividend income during the previous year and to exclude strategic investments while computing the average value of investments for disallowance under section 14A read with rule 8D.

6. Forfeiture of Share Warrants:
The Tribunal held that the amount received on forfeiture of share warrants is a capital receipt not liable to tax. This conclusion is based on judicial precedents such as Graviss Hospitality Ltd. v. Deputy CIT, which clarify that such receipts are not trading receipts and should be treated as capital in nature.

7. Adjustment of Refund and Credit for TDS:
The Tribunal directed the Assessing Officer to verify TDS certificates and give credit for taxes deducted at source, ensuring compliance with the Dispute Resolution Panel's directions.

8. Additional Depreciation under Section 32(1)(iia):
The Tribunal allowed the carry forward of unclaimed additional depreciation to the subsequent year, aligning with judicial precedents such as CIT v. Rittal India Pvt. Ltd. (No. 1), which support the liberal interpretation of beneficial legislation.

9. Sales Proceeds of CER Units as Capital Receipts:
The Tribunal upheld that receipts from the sale of CER units are capital receipts not chargeable to tax, supported by judicial precedents like CIT v. My Home Power Ltd.

10. Depreciation on Account of Sales Tax Remission and IPA:
The Tribunal held that the subsidy in question was a capital receipt not chargeable to tax and that the action of reducing the depreciation claim by adjusting the written down value was improper.

Conclusion:
The Tribunal provided detailed directions on each issue, emphasizing adherence to judicial precedents and statutory provisions. The appeals were decided with specific instructions for reassessment and verification, ensuring a thorough and fair resolution of the disputes.